investment

The best entrepreneurs know how to talk about and sell their company, and the way they define their enterprise can often be a polarizing sport. Essentially, propelling a young company – either to investors or to talent – is a sales job, and one that a company founder must find compelling. Marc Andreessen, serial entrepreneur, speaks at length about the necessity of a founder to define their company and to establish early on what it is, and what it is not.

An investment value proposition is the overall monetary value an entrepreneur proposes his company will deliver at some future point to the investor in exchange of the investor’s money. The exchange the investor is looking for is a higher multiple return on the capital invested in this company than what could be derived from existing public market instruments such as shares on a stock exchange.  Investors look for higher returns because of the risks involved with entrepreneurial companies however wage their capital in the hopes the returns will be far higher than traditional investment instruments.

Elements of an Investment Value Proposition

A product value proposition has a number of critical elements that form the value offering to customers.  The design of the product is tailored to the unique needs of the target customers.  It addresses the problem and capabilities better than competitors thus creating differentiating advantage in the marketplace.

An investment value proposition is very much like a product value proposition but with differences in the elements of value. The key elements important to investors are described below.

The Nature of the Business and Market

The type of business a company is building and the nature of the marketplace in which it will operate is a major starting point in the evaluation of investment opportunities. The reason for this is high adoption rates in large growing industry sectors provide fertile ground for scalability. What is meant by scalability is the ability to grow a company based upon high metrics of market size and growth rates in an industry which ultimately lead to higher returns for the investor. To use the axiom, “high tides raise all boats” that means in a large, fast growing market opportunities abound for a company to be successful.  These conditions signal to an investor the right fundamentals are ripe to look deeper into an investment opportunity. This is why many investors look at industry sectors well over a billion dollars in size and double digit growth rates.

Understand the Market Need

Investors want to know if the entrepreneurial management team has a comprehensive understanding of the customer and how to satisfy their needs.    The product offering shouldn’t be a “half inch drill”; it should be a “half inch hole”, that is it should be a product that is a solution to a problem. Using solid market research and analysis, entrepreneurs can improve their chances of securing the investment required by knowing what solutions matter to their customers.

Sustainable Competitive Advantage

Another factor influencing an investor’s decision is whether the business has a competitive advantage and if this advantage is sustainable.

Competitive advantage can diminish over the course of the business due to many reasons. Customers’ perceptions to the product may change over time. Their requirements and needs may change. New competitors will enter the market. Or simply, patents and legal rights held over a proprietary technology or invention might expire. Whatever the reason, entrepreneurs need to demonstrate that the business model identified for the company will be sustainable.

The Management Team

No matter how impressive the product or how lucrative the market opportunity, a capable management team makes a tremendous impact on a company’s success. As it has been observed, the quality of the management team is the deciding factor.

The Milestone Plan

Developing a milestone plan and meeting the milestones as set forth in the business plan demonstrates to potential investors the capabilities of the company through “real live” performance executed by the management team.

Reaching significant milestones that create step-ups in the share price has a powerful benefit for founders and investors. Demonstrating value is the basis of creating a solid investment value proposition.

What Investors Don’t Like to See

The following five mistakes should be avoided when dealing with investors – committing any of these mistakes, even once, may compromise the chance of sourcing the required capital:

• Not explaining the problem the product is solving – In other words, failing to communicate how the product will ease customer “pain”.
• Falling in love with technology and ignoring customer needs.
• Stating there is no competition for the company’s product – Any product has at least some sort of competitive substitute. For example, although the first fax machine had no direct competition, there certainly were other means of delivering messages such as the telephone and postal mail.
• Failing to prepare a detailed financial plan – Entrepreneurs need to demonstrate they know their numbers inside-out and that they have done detailed and careful financial analysis.
• Claiming the financial forecasts are conservative – The moment entrepreneurs say the phrase “we prepared conservative projections” they signal to investors their naïveté. There is no room for wide-eyed optimism.

Let’s look at some tips that will help entrepreneurs handle negotiating sessions with confidence and success.

The best of us can sometimes lose perspective, be unmindful of certain aspects of the business, or be swayed by certain issues to the neglect of others. So it is important that entrepreneurs don’t allow themselves to be caught alone with one or more of investors team when negotiating. Get your lawyers, advisers, fellow entrepreneurs or management team on your side and in the same room before you begin negotiations.

Never over the Phone

Don’t convert a phone call into a negotiating session, not even when you think you are prepared. Entrepreneurs should not put additional pressure on themselves by carrying on a conversation that is actually a negotiating session. In hurried calls, entrepreneurs are likely to make hasty decisions or commit themselves to a position that may be far from ideal. Be polite but firm and seek face-to-face negotiations.

Preparation Is Key

Remember that while this might be your first session, or maybe the first few, investors are far more experienced. Negotiation is an art. While entrepreneurs can’t expect to become master negotiators, preparation can help a lot.

Set Goals

Depending on what you are negotiating, set goals and a broad range between which you are willing to negotiate. For example, how much of the company are you prepared to give away? It helps to set a range before you begin negotiations.

Start High but Be Realistic

A good negotiation strategy is to start high, without being ridiculous, and show a readiness to make concessions. It will reveal an entrepreneur as ambitious but practical, and keen for a deal. At the same time, don’t succumb to sharp bargaining.

Avoid Deadlocks

A good negotiator can see a deadlock before it really emerges, and has a way to avoid them. On many occasions, it is useful to defer negotiations on a particularly thorny issue, maybe to the next session, and find common ground on others. This gives both sides the time and the opportunity to do more home work and/or take a more dispassionate view.

Be a Good Listener

Good negotiators are good listeners. Be alert to every word and don’t let your attention slip.

The single most important trait you need to possess or develop is patience. Deals with investors do not take place in the matter of a few hours. They happen over several negotiating sessions. Give yourself enough time and space to carry out the talks.

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